MONETARY POLICY ONLY

MONETARY POLICY is conducted by the ____

Federal Reserve

What is the Federal Reserve (Fed)

The Nations Central Bank (created to end financial panics that occurred)

Monetary Policy establishes ____

The AMOUNT OF MONEY available in the economy (the money supply)

What is the goal of the FED?

Growing an economy with LOW INFLATION and LOW UNEMPLOYMENT

What does the FED do in a BAD ECONOMY (recession, high unemployment)

Encourage economic growth (spending) by increases the amount of money in circulation (Expansionary Policy)

What does the FED do in an “OVERHEATED” ECONOMY?

Attempt to slow economic growth by engaging in a contractionary money policy by making credit ($) more expensive and less abundant

The FED can regulate the money supply by changing the Reserve Requirement. What is the Reserve Requirement?

The percentage of total deposits that a bank must hold as Reserve in their own vaults and not lend out (about 10%)

*The money that is not kept in reserve may be lent to consumers

*a HIGH Reserve Requirement leads to FEWER loans while a LOW Reserve Requirement leads to MORE loans

The FED can regulate the money supply by changing the Interest Rate. How does the FED change the Interest Rate?

The FED changes the Interest Rate by changing the Discount Rate (The rate at which a bank can borrow money from the FED district bank).

*This method is used if a bank doesn’t have enough reserves or if people suddenly withdrew large amounts of money.

The FED can regulate the money supply through Open Market Operations. What are Open Market Operations?

Open Market Operations are the FED buying and selling bonds (to/from public OR commercial banks)

*When the FED buys bonds they are INCREASING the money supply and when the FED sells bonds they are DECREASING the money supply.

Name 3 ways the FED can regulate the money supply

Change the Reserve Requirement, Change the Interest Rate, Through Open Market Operations